Trade tax is a municipal tax paid by companies and self-employed individuals on their business income. It represents a significant source of revenue for municipalities and is used to finance local infrastructure and public services. The calculation is based on business income, which is derived from company profits.
The trade tax rate is set individually by each municipality and usually varies between 200% and 500%. As a municipal tax, the assessment and collection of trade tax are the responsibility of the individual municipalities. This means that tax rates can differ from place to place.
Companies are obliged to pay trade tax to the municipality in which their registered office is located. It is a direct tax, as it is paid directly by the taxpayer to the municipality. Trade tax is subject to the Trade Tax Act (GewStG) and is regulated at the federal level, while the rates are determined at the municipal level.
To calculate trade tax, the business income is multiplied by the tax rate (3.5%), which results in the tax assessment amount. This is then multiplied by the respective municipal tax rate to determine the trade tax payable.
Correct determination of VAT liability
- Trade tax is a tax levied on companies based on their profits.
- All tradespeople, i.e., sole proprietors, partnerships, and corporations, are obliged to pay trade tax.
- The amount of trade tax is calculated based on the business profit and the multiplier rate of the respective municipality.
- There are tax allowances and exemptions for trade tax, for example, for small business owners and farmers and foresters.
- Trade tax must be paid quarterly in advance, with the exact deadlines varying depending on the municipality.
Who is obligated to pay trade tax?
Businesses subject to trade tax
Liability for trade tax arises when a company operates a permanent business. A permanent business exists when an independent, sustainable activity is carried out to generate income.
Prerequisites for trade tax liability
It does not matter whether the company makes profits or losses. Even if a company does not generate profits, it is still obliged to pay trade tax.
Trade tax liability regardless of profits or losses
Trade tax liability is independent of profits or losses made. It is sufficient for the company to carry out an independent, sustainable activity to be liable for trade tax.
How is the amount of trade tax calculated?
The amount of trade tax is calculated on the basis of business income. Business income is derived from the company's profit, adjusted by certain additions and deductions. Additions include, for example, rent and lease payments, leasing installments, and certain financing expenses.
Deductions, on the other hand, include, for example, carried forward losses and certain allowances. The calculation of business income is carried out in accordance with the provisions of the Income Tax Act. The tax profit determination methods such as the revenue surplus calculation or balance sheet accounting are applied.
The business income determined in this way forms the basis for the calculation of trade tax. The amount of the tax rate, i.e., the percentage by which the business income is multiplied, varies depending on the municipality and can range from 200 to 400 percent.
What exceptions and allowances are there for trade tax?
| Exception/Allowance | Amount |
|---|---|
| Tax allowance for partnerships | 24,500 Euros |
| Tax allowance for natural persons | 24,500 Euros |
| Tax allowance for agricultural and forestry businesses | 24,500 Euros |
| Exemption for non-profit organizations | tax-free |
There are certain exceptions and allowances for trade tax that serve to relieve small and medium-sized enterprises. For example, allowances can be claimed that reduce business income and thus reduce the amount of trade tax payable. There are also various addition and deduction items that influence the amount of trade tax.
Furthermore, there are certain businesses that are exempt from trade tax. These include, for example, agricultural and forestry businesses as well as non-profit organizations such as associations and foundations. Small business owners may also be exempt from trade tax under certain conditions.
It is therefore advisable to inform yourself in advance about possible exceptions and allowances in order to optimize your trade tax burden.
How and when must trade tax be paid?
Trade tax is generally paid quarterly as an advance payment to the responsible tax office. The exact dates for the advance payments are set by the tax office and communicated to the companies. The amount of the advance payments is based on the estimated business income for the current year and is determined based on the last tax assessment notice.
After the end of the fiscal year, companies must submit a trade tax return, in which they declare their actual trade earnings. Based on this return, the final amount of trade tax is determined. If a back payment results, it must be settled within a specified period.
In contrast, if there is an overpayment, a refund will be issued by the tax office.
What are the consequences of not paying trade tax?
Failure to pay trade tax carries various consequences. First, default interest becomes due, increasing the amount owed. Additionally, the tax office can issue reminders and initiate enforcement measures to collect the outstanding amounts.
These include, for example, the seizure of accounts or receivables, as well as the initiation of insolvency proceedings. In the worst-case scenario, non-payment of trade tax can lead to the closure of the company. Furthermore, managing directors and shareholders can be held personally liable if they fail to meet their payment obligations.
Therefore, it is extremely important to adhere to the payment deadlines for trade tax and to seek dialogue with the tax office early on in case of payment difficulties.
Tips for optimizing trade tax burden
Various measures can be taken to optimize the trade tax burden. This includes, for example, utilizing tax-free allowances and deduction options to reduce trade earnings. Investments in the company can also be claimed for tax purposes to reduce the assessment basis for trade tax.
Furthermore, forward-looking tax planning can help minimize the trade tax burden. This includes, for example, choosing a suitable legal form or optimizing operational structures. Tax-optimized arrangements such as restructurings or business succession can also contribute to reducing the burden of trade tax.
In addition, it is advisable to regularly stay informed about current tax developments and, if necessary, to seek professional advice. A tax advisor can help identify individual structuring options and develop tax-optimized solutions. Through targeted tax planning, companies can reduce their trade tax burden in the long term and improve their economic situation.
